Analysis: Sweeping Apple win, but Samsung set for bounce-back

SEOUL Sat Aug 25, 2012 1:33am EDT

An employee poses as he holds Apple's iPhone 4s (L) and Samsung's Galaxy S III at a store in Seoul August 24, 2012. REUTERS/Lee Jae-Won

An employee poses as he holds Apple's iPhone 4s (L) and Samsung's Galaxy S III at a store in Seoul August 24, 2012.

Credit: Reuters/Lee Jae-Won

SEOUL (Reuters) - Defeat in a bitter patent wrangle with Apple Inc, its smartphone rival and biggest customer, will dent Samsung Electronics Co's $21 billion cash-pile, but could actually help cement its leadership in the global smartphone market.

A U.S. court has ordered Samsung - which sold around 50 million phones in April-June, almost twice the number of iPhones - to pay $1.05 billion damages, after ruling that the South Korean firm infringed on some Apple patents.

While the verdict was a big win for Apple, the damages are less than half the $2.5 billion compensation it sought - although that could yet be increased by the judge - and are just 1.5 percent of annual revenues from Samsung's telecoms business.

That phone and tablet business is the powerhouse behind Samsung's growth, earning around 70 percent of total profit. The group had net profit of $4.5 billion in April-June.

Samsung could also see its popular Galaxy smartphone banned from sale in the United States. But its skill as a "fast executioner" - quick to match others' innovations - would likely mean tweaked, non-patent infringing devices would be on the market soon after any ban came into place.

"Samsung has already made some design changes to new products since the litigation first started more than a year ago," said Seo Won-seok, an analyst at Korea Investment & Securities. "With the ruling, they are now more likely to make further changes or they could simply decide to raise product prices to cover patent-related payments."

Also, Apple's demands for Samsung to pay it a royalty on its phone sales could hit rival phones using Google's Android operating system more than it hits Samsung. If anything, the blaze of publicity from the high-profile, high-stakes U.S. litigation has made Samsung's brand more recognizable.

CONTRADICTING VERDICTS

The California jury had only begun deliberating on Wednesday after a complex weeks-long trial. Friday's verdict on seven Apple patent claims and five Samsung patent claims suggests the nine-person panel had little difficulty in concluding that Samsung had copied some features of Apple's iPhone and iPad.

It could lead to an outright ban on sales of key Samsung products, with Apple saying it planned to file for a sales injunction within seven days and the judge in the case setting a hearing on September 20.

Because the jury found "wilful" infringement, Apple could seek triple damages.

The U.S. ruling, read out to a packed federal courtroom in San Jose, just miles from Apple's headquarters, came less than 24 hours after a Seoul court found that while the iPhone and Galaxy look very similar Samsung hadn't violated Apple's design.

Samsung issued a defiant response to the U.S. decision, which it called "a loss for the American consumer", indicating the legal tussle is far from over. "This is not the final word in this case or in battles being waged in courts and tribunals around the world, some of which have already rejected many of Apple's claims," Samsung said in a statement.

Nomura analyst CW Chung, speaking before the verdict, predicted it could take "many years" for Apple and Samsung to settle the case whatever the result of this round, leaving the two firmly in control of the $200 billion-plus global smartphone market.

"The litigation may end up with both parties entering a cross-licensing agreement, which should enable them to build a higher patent wall in the smartphone market," said Chung. "This would have a positive impact on the share prices of Samsung and Apple, while posing a substantial threat to other competitors."

Based on the damages ruling, Samsung is asked to pay Apple around $10 royalty per phone, a move seen aimed at slowing rival phones that run on Android - which account for more than two-thirds of the global market.

If Apple were to pursue similar legal challenges against other Android manufacturers that could squeeze profit margins as smartphone prices decline in a growing market - reinforcing the dominance of Samsung, one of the few with big enough margins to absorb the extra cost.

Handset competitors using Android include Taiwan's HTC Corp, LG Electronics, Google's Motorola, Sony Corp and some Chinese brands.

WIN SOME, LOSE SOME?

Although Samsung had been viewed as the underdog in the U.S. case, the sweeping nature of Apple's victory was something of a surprise, with many analysts having expected a mixed ruling.

Concerns over potential reputational damage, the short-term cash hit and the impact on billions of dollars of business with Apple had knocked as much as 5 percent off Samsung's shares this week in the run-up to the verdict. But the stock is still up nearly 50 percent since Apple filed its accusations.

Samsung has previously been able to move nimbly to release model upgrades by the time courts have ruled certain products infringed Apple patents and retire patent-infringing models from its line-up. It has skirted around those rulings with a few engineering tweaks and has also made some bold design changes to differentiate its devices from Apple's.

"The impact on Samsung will be quite limited, as affected models are mostly legacy products and its new products did make some design changes to avoid potential litigation," said D.J. Jung, representative patent attorney for SU Intellectual Property.

"Still ... it's a sweeping loss in the most important market. It's inevitable that Samsung's brand will be negatively affected - Samsung could be perceived as a copycat."

Even though Samsung's flagship Galaxy S III phone was not involved in the trial, the jury validated Apple's patents on features and design elements that Apple could then try to wield against that product.

It is possible Apple would not have to seek an entirely new trial against the S III, but rather include it in a "contempt proceeding" which moves much faster, said Nick Rodelli, a lawyer and adviser to institutional investors for CFRA Research in Maryland.

Seoul-based Jung predicted further appeals and fresh suits against newer products as the rivals continue to clash in court.

"It's going to be a very drawn-out battle," he said. "They will keep suing each other, appeal against unfavorable verdicts and bring in new products ... because the stakes are too high. They don't want to lose their initiative in the fast-moving smartphone market."

OUTSIDE THE BOX

In a research note before the verdict, UBS analysts said an Apple win could, in the long-run, hurt the U.S. firm "as the real threat is not a competitor beating Apple at its own game, but instead changing the game.

"The likelihood of Apple being leapfrogged or a rival creating a new category (of device) is greater if they have to think out of the box. If they just copy Apple, like Coke, Apple can claim to be 'the real thing'."

Samsung also looks to be staying ahead of the curve - by reviving the stylus function, derided by Apple's Steve Jobs, in its latest tablets and by creating the hybrid phone-cum-tablet, or phablet, category, with its 5.3-inch Note.

Apple, which has largely stood by its original form and design, is taking note, with speculation that the next iPhone will have a bigger screen and new iPads may be smaller.

In China, set to become the world's biggest smartphone market this year, Samsung has almost twice Apple's market share, and the iPhone slipped to fourth in the market in April-June, overtaken by both Lenovo Group Ltd and ZTE Corp, according to latest data from industry research firm IDC. [ID:nL4E8JO1SB]

Despite, or because of, the publicity from the U.S. case, and more than a dozen pending cases elsewhere around the globe, the Samsung brand has gained recognition - as an equal to Apple rather than merely a supplier.

In a recent Campaign Asia-Pacific brand ranking, Samsung came top ... ahead of second-placed Apple.

($1 = 1135.9500 Korean won)

(Additional reporting by Dan Levine in SAN FRANCISCO; Editing by Ian Geoghegan and Alex Richardson)

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